KUALA LUMPUR: A very taxing year is about to come to a close. The new year brings about hope of an end to the global health crisis, with the rolling out of vaccines, and the start of tangible economic recovery.
Nevertheless, gloom in the form of the shadow economy still looms large over the nation, taking away much needed resources from the government and causing socio-economic harm.
According to Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz, Malaysia's shadow economy accounts for 21 per cent of Gross Domestic Product, amounting to about RM300 billion annually.
In a pre-2021 Budget interview with the New Straits Times, the finance minister pledged to reduce this leakage by curbing illicit smuggling of high-duty goods like cigarettes. This promise was reflected in a series of measures to curtail the tobacco black market being tabled in the 2021 Budget.
A recent NST Roundtable based on the theme, Spotlighting Shadow Economy to Fund Economic Recovery, was held to discuss this issue from multiple perspectives. The goal is to determine what more can be done to help the government plug leakages and rebuild our economy.
The panellists were made up of prominent but diverse individuals consisting of Tricor Malaysia chairman Dr Veerinderjeet Singh; former Sarawak police chief Datuk Dr Yusoff Nook; Transparency Malaysia past president and Association of Certified Fraud Examiners (ACFE) - Malaysian Chapter president Datuk Seri Akhbar Satar and newspaper columnist and investment and economic analyst and commentator Pankaj Kumar.
The NST Roundtable was moderated by New Straits Times senior news journalist Arfa Yunos.
The Roundtable discussed the serious threat posed to Malaysia's economy and society by the black market, drew attention to new enforcement measures announced in the Budget and noted the importance of a holistic approach to stop demand for illegal cigarettes by considering the introduction of a new product excise tier that would allow legal cigarettes to compete with the black market.
The following are excerpts from the NST Roundtable:
Question: Why has the shadow economy remained top of mind for the Malaysian government and our finance minister? How serious is this issue in Malaysia?
Pankaj: The shadow economy takes away the government's ability to generate revenue from economic activity via the taxation system. Based on a revenue of RM236.9 billion, the government has lost 12.7 per cent of its revenue to the shadow economy in 2020. This is not a small sum to be ignored!
Veerinderjeet: The estimation of the size of the shadow economy is very subjective. From a tax standpoint, we can have an instance where legal companies are filing tax returns but not declaring the full amount or do not pay tax altogether. Then there could also be illegal earnings from smuggling activities and even corruption that are naturally not reported at all. These are all part of the shadow economy and the numbers could be larger than we think.
Yusoff: The shadow economy, specifically illicit trade, is under the purview of economic crime, which is largely hidden and secret. From a law enforcement perspective, the cost of economic crime in Malaysia is estimated to be more than RM200 million a year. However, the scale could be much more as the data used is opaque. I predict in the next 10 years, the cost of economic crime could reach the trillion ringgit mark.
Akhbar: Malaysia is losing RM5 billion per year to the tobacco black market alone. The size and scale of this segment is facilitated by corruption. In turn, the funds generated by illegal cigarettes fuel corruption. This creates a vicious cycle that has led to the severity of the problem today, where 65% of the total market is made up of illegal cigarettes.
Question: What are the factors fuelling the shadow economy, specifically the tobacco black market.
Akhbar: Lack of sincere political will to curb corruption, effectiveness of the law enforcement agencies affected by corruption and lackluster public support to curtail the shadow economy are primary factors fuelling this problem.
Yusoff: Failure to define illicit trade like the tobacco black market under a comprehensive framework like economic crime. This has prevented integrated law enforcement action, policymaking and data sharing.
Veerinderjeet: The shadow economy could also be fuelled by a trust deficit that exists today between taxpayers and the government. Taxpayers may not be convinced that their tax monies will be spent effectively, which may lead some to find ways to avoid, if not evade tax.
Akhbar: I agree. And this is exacerbated by some public officials who think that their salary comes from the sky, not from the rakyat. They should realise that the taxpayers are paying their salaries and do their jobs properly.
Question: The finance minister has singled out illegal cigarettes as a significant problem area in the shadow economy. In the 2021 Budget, a string of initiatives were announced to combat the tobacco black market. Are these initiatives enough?
Akhbar: It looks good on paper. The main problem is the integrity of the law enforcement agencies. We have to make sure that the individuals given the responsibility to carry out the new legislation are honest enough to enforce them.
Pankaj: It is a step in the right direction. Looking at the bigger picture, high excise duties contributed to the tobacco black market boom in Malaysia. Between 2013-2015, excise duties were raised by as much as 40 per cent, causing a significant jump in retail cigarette prices.
The demographics of smokers today are dominated by the B40 segment. Assuming a pack of 20 cigarettes costs RM17.40 and if one smokes 20 packs a month, that's RM350 a month or equivalent to 16 per cent of our current Poverty Line Income (PLI) at RM2,208 per month for 2019. With such high concentration in expenditure, it is natural that consumers will demand something cheaper. They just can't afford legal cigarettes.
Veerinderjeet: If a tax for a product is too high, it is natural that people will move to cheaper alternatives. You can raise taxes only to a certain extent.
The initiatives against the tobacco black market announced in the 2021 Budget are sufficient only if the enforcement agencies and politicians are convinced they can enforce it well. We are great in coming out with ideas but enforcement is always a problem!
Yusoff: Enforcement is always a challenge but this could be due to factors ranging from fear of reprisal due to the Official Secrets Act, which any government officer must comply with, to the lack of knowledge and training in managing governance issues.
Question: What else can the government do to tackle the shadow economy, especially the tobacco black market, once and for all?
Yusoff: The margins from the tobacco black market are great, so we have to address that to deter those from perpetrating this crime. Education is also important, we need to reinforce our value system.
Veerinderjeet: In relation to illegal cigarettes, the government is not only losing out on excise duties, it is also losing out on uncollected tax on the earnings of this industry.
If we are looking at excise duties imposed on a product, higher taxes are obviously not the answer. The solution should be to bring down the excise duties on cigarettes coupled with stringent enforcement and public education.
If bringing down the entire excise duty structure is not possible, we should consider allowing tobacco companies to introduce a new product, taxed at a lower rate via a new excise tier. This will create a lower priced segment of legal cigarettes that can viably compete with illegal cigarettes based on price.
Pankaj: I agree as the tobacco black market problem boils down to high excise duties. We need to narrow the price gap between the legal and illegal cigarettes. This will disincentivise criminal syndicates from smuggling illegal cigarettes as the profitability margins will be eroded.
Akhbar: We can all agree that it is high time we went after the syndicates through enforcement as well as excise reforms. The shadow economy like the tobacco black market will continue to corrupt our government and social institutions if holistic solutions are not put in place.